Aviva and the current price collapse of irredeemable preference shares.
There has been a collapse in the price of AV.A from over 175p to 118p and similar falls in respect of AV.B and RSAB.L following Aviva’s shocking declaration that they intended to take steps to retire their cumulative irredeemable preference shares. It would seem that the skills of Mark Taber will be called on again to assist those seeking stable fixed dividends with minimal risk from being shafted by slick legal legerdemain on the part of another institution whose business relies on the assumption that they can be trusted.
As Mark Taber has tweeted it has not previously been doubted by professionals involved in the fixed interest market that cumulative and irredeemable ment just that and the preference share price has prior to Aviva’s announcement reflected this understanding.
Does the current pref price collapse in fact present an opportunity?
No help of course may be expected from the useless FCA.
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45 comments
Indeed good news on a bad day. Lloyds Banking (LON:LLPC) are up 8%.
I'm going to go and lie down, I've come over all faint ...
Agreed! I'm not that surprised by the final outcome for the AV.A/Bs, but it's proved a lot quicker and easier than I expected! It's particularly good news for the GA prefs which I thought were very exposed, since Aviva owns all the ords.
Hopefully the way in which this has collapsed so quickly, and the degree, and spread of opposition, will make any other pref issuers who might have been thinking of letting lawyers loose on their terms think more than twice about doing so.
Peter
Very good progress but we are still not back to pre announcement prices.
A stunning climbdown by Aviva this morning via a pair of RNS re GA & Aviva Prefs! Well done Mark Taber!!!
Stunning indeed:
https://www.investegate.co.uk/...
https://www.investegate.co.uk/...
I'm going to go and lie down, I've come over all faint ...
timarr
http://www.parliament.uk/documents/commons-committees/treasury/Correspondence/Chair-to-Andrew-Bailey-re-Aviva-preference-shares.pdf
Thomas Stoddard for the chop.
Aviva's credit spreads have widened 15-20bps since they dropped the 'we can go about cancelling the rights of our preference shareholders bombshell.' So that wipes out any net reduction in funding costs from cancelling the preference shares and ord shares are worse off !
Pref holders having the potential to have their holdings redeemed at par for a huge capital loss
Clients Aviva's last annual report shows they invested £305 million of customers money in 'non-redeemable preference shares'. So Aviva's reckless 'we can cancel rights of pref shareholders' bombshell will have hit its customers by about £100 million !
Company's Reputational damage.
Is it not time for some Board Casualties ?.
There is an excellent blog post here from avidya - well worth a read if you are worried by Aviva's disgusting money grubbing actions.
https://www.lemonfool.co.uk/viewtopic.php?p=124253#p124253
Two further points. Write to all the NEDs (I have) as they could outvote the executive. Also, question how much Aviva's own investment portfolio has been damaged by their ham fisted announcement. They will hold lots of prefs. unless they sold out of these before the announcement . Then insider trading ?
Not strictly on topic but Ecclesiastical Insurance Office (LON:ELLA), of which I hold a small truckload, announced their results yesterday:
https://www.investegate.co.uk/...
PBT up 32%, lots of interesting developments - and £27 million donated to charity, now the 4th largest UK corporate donor by value. Leaving aside the charitable focus I wish more companies were run like this and produced reports this transparent.
timarr
Just the opposite timarr - but I have noted postings defending the point that words cannot be taken at face value but must be referred to within the contractual documentation as to their exact meaning
Nonsense, Flackwell.
Any investor who wants to end up ahead needs to throw away the rose coloured spectacles and understand the issues that ultimately matter. In this the morals of Aviva's actions only come into play in a very peripheral way - to what extent could their reputation be damaged amongst clients and institutional investors. I'd suggest that history shows us that those effects are limited.
If Aviva go through with a par return of capital (which they have yet to say they will do) then the things that matter are the lawyers and courts interpretation of the words used in the prospectus. Those may well differ from the lay investors understanding - in fact quite clearly given the recent SP they do, if Aviva are right. They will not give a moments attention to "moral" issues or lay interpretations.
This may yet not happen, and Aviva may not succeed, but that is where arguments about lay investors (and apparently many institutional investors) understanding of the terms becomes relevant. The more pressure that can be brought to bear now the more chance that Aviva will rethink, or at least come up with some form of above par deal. For example if that is Aviva's interpretation of the terms of the prefs - which go back many years - why have they failed to notify the market as the prefs moved well above par. It could certainly be argued they had a duty to do so.
Peter
some of the morals displayed on this board both amaze and stagger me
Hope Karma comes into play - that would make my day
Hi Flackwell
some of the morals displayed on this board both amaze and stagger me
Don't understand that - I don't think a single person on this thread thinks Aviva's actions are morally OK. Are you saying you think they are?
timarr
Just the opposite timarr - but I have noted postings defending the point that words cannot be taken at face value but must be referred to within the contractual documentation as to their exact meaning
Poppycock in my book - and totally indefensible
Irredeemable has a distinct meaning that 99% of the population could get right - why can't Aviva?
Just the opposite timarr - but I have noted postings defending the point that words cannot be taken at face value but must be referred to within the contractual documentation as to their exact meaning
Well people, mainly me, are pointing out that in practice this is likely to be the way that the courts will treat any legal proceedings, so investors need to put their emotions on the backburner in considering the financial implications of the situation. That doesn't mean I agree, it's just best to be realistic about the way this would probably pan out if it went to court. Hopefully the board will back down, especially if there's enough interest to have them hauled in front of a Parliamentary Select committee for a ceremonial roasting.Irredeemable has a distinct meaning that 99% of the population could get right - why can't Aviva?
I imagine that the board will come out with some nonsense about their responsibility to maximise shareholder value trumping considerations of morals. Which would not just be ethically wrong but also disingenuous as they're seeking to stiff one class of shareholder in order to benefit another.
timarr
I agree.
I don't have an investment here but the common understanding has always been that any class of shares should be the sole arbiter of any change that only affects that class of shares. And if the effect of any change was to reduce the amount payable on one class of shares to the benefit of another, without the consent of that first class, I would have thought a strong case exists for claiming fraud upon the minority. But in the end, nobody wants this to end up in court and you can only hope that sense prevails.
Irredeemable has been taken by the market to mean just that. By their statement Aviva have driven down the price of the AV.A & AV.B & GACB. If they seek to buy in this stock at the reduced price, would this be benefiting from market manipulation and hence a criminal offence ? I agree that we should seek to shame Aviva into cancelling the redemption proposals ( they are only "under consideration, I think" and vote against ay resolution so to do. I have written to the Chairman and if many more people do this, it may help.
Hi Ostemple, It seems you have come out better than most others from a high of around 154p high to 142.1p today..That's nearly an 8% drop in the share price, so not too bad. Not sure what the current div payment is, but I would suggest it would not be the 8% , around 12p. if it pays out 2x a year that is about 6p now. You should Know what the payment is..
I can only see from their results out today the dividend for 2017 was 4p
Hi Lightningtiger
Think you are confusing the classes - RUSP pays a fixed 12p dividend.
The point I was making was the price was already falling, nothing to do with Aviva announcement (it was back to where it was 6 months ago).
Today, however, the price is falling significantly so perhaps there is some contagion. Directors are big holders of the prefs so don't think the risk is there with RUSP so if it continues I will think about topping up.
This big drop in preference shares has hit all of them, and they are supposed to be classified as low risk investments according to Money Observer a while ago. So much for the regulators! I have been holding SAN for a few years & it has just gone XD ,then a small drop but a day later bang, a big drop down. Fortunately I sold about 80% earlier this year, so my portfolio has a minimal impact. I was considering buying back some more before they went XD but could not find the XD date coming up.
Out of 10 preference shares that have all been hit,ELLA is the only one starting to spring back. The other 9 are all down big time: NWBN, SAN, BWSA, GACA, RSAB, NTEA, RUSP, LLPD.
Dividenddata.com gives a list of shares about to go XD and payment dates as well as what %age of dividend paid. Top 4 XD dates 15/3/18 are 3IN,21%, MIG1,13.8%,MAV4, 11.79%, MIG5,11.38%. These are not preference shares but may be worth considering.There is one fund and 3 VCT's.
Bear in mind when the share price drops the dividend yield goes up.
Not sure how you can say RUSP is down big time, it has fallen a few pence and had been drifting down for a few weeks already.
Think the statement in the results for Raven Russia today stating that the board view prefs and ords as treated the same in terms of cancellation is very positive (these do not seem to have the clauses that have caused the concern in the banks / insurance prefs) so happy to continue to receive my 8% income tax free (unique to raven preference shares i believe) script dividend shares
It is interesting that investors lost the battle on the ECNs at the Supreme court largely because the courts relied more on "commercial intent" than the investors interpretation of the terms. Very simply put the courts decided that a "regulatory par call" must mean that if the regulator changed the meaning of what was capital the bank could call the ECNs. That contradicted one interpretation of the way the contract was written.
We seem to be in the reverse situation here. The law seems to suggest the irredeemable can be effectively redeemed through cancellation. However clearly that wasn't the commercial intent.
Interesting comment from Ecclesiastical this morning
https://www.investegate.co.uk/ecclesiast-ins-off---ella-/rns/ecclesiastical-preference-shares/201803120910253837H/
Damn right.
Still holding Ecclesiastical Insurance Office (LON:ELLA). Even aside from the RNS they're the safest preference bet in the market based on their corporate governance.
timarr
Not familiar with the particulars here, but presumably there’s also a strong case for ongoing investors being misled by the issuer and their market making agents (especially if as suggested there have been ongoing repeat issues at a material premium to par). If the price of the instrument in the secondary market was being sold at something like 180% of face value, this can only be made on the premise that the above market coupon was “perpetual”, i.e. the premium effectively being the present value of an indefinite stream of above market coupons. While the issuer call option might be buried away in the letter of the underlying contract, these instruments appear to be targeted and sold to retail investors (not least due to the small denominations of the notes) for whom their is generally a much higher duty of care who have been (mis)sold something at a false price in such a way that there’s a much bigger can of worms than simple bad faith. PPI springs to mind .... so perhaps the opportunity referred to in the original opening thread might be for some enterprising ambulance chasing lawyers.
Gus.
There's no duty of care with quoted instruments, it's caveat emptor, the fact that investors have been treating the preferred stock more like perpetual bonds than shares doesn't change that. However, I suppose that if shareholders were put in the stock by an advisor, rather than making the decision themselves, they may have a case against the intermediary.
Nor does the mere existence of a cancellation clause indicate misselling. A cancellation clause is a technical necessity to deal with normal business events including winding up a company in an orderly manner. I'd imagine that when the preference shares were issued no one ever envisaged that the cancellation clause would be used as a backdoor way of redeeming the irredeemable, rather than as a necessary action on some form of corporate event.
Based on previous experience it's unlikely that the courts will take into consideration the original expectations, and will probably base their decisions on the wording of the prospectus. Holders will probably be better off trying to block the resolution. I doubt it will stop the eventual redemption, but it might force Aviva into making a better offer.
timarr
I still feel for the holders here. At the very very least surely if you call something "irredeemable" but they are not , then that is actually even false advertising.
Also having in the small print "irredeemable until cancelled" , surely you shouldn't be allowed to put nonsensical stuff like that anywhere in a contract. Read it and repeat it. It's nonsense.
Timarr
In the absence of an expression of outrage at Aviva’s action I had lazily assumed that you regarded their action to be morally neutral. I appreciate the point you make and sadly agree that the adverse affect on Aviva is likely to be disappointingly slight.
All too often those who been swindled by some barely legal slight of hand receive scant sympathy because those unaffected consider they would have been too smart to have beoen ciaught out. In practice I think that Aviva will have little difficulty raising further funds through some other instrument than irredeemable preference shares in the future. Memories are short among those not directly and painfully affected and the usual bias of overconfidence in ones’s own judgement will ensure future investors will believe it will not happen to them.
I do, however, believe that the steady drip drip of similar pieces of chicanery on the part of large institutions will eventually affect the rate at which money can be raised and in the long term is not good for the health of our economy.
Your general point that investment decisions are best made with a cool head is well made. I shall certainly look in detail at the RSAB.L prospectus to assess the risk of continuing to hold them. I will also in future be more inclined to take into account the increased propensity of institutions to adopt a morals free approach to running their affairs
In assessing the risks of any investment. My cancellation of my insurance with Aviva will merely be a risk free gesture that no doubt will have zero affect on them.
Homosap
I can appreciate that investors in these preference shares are feeling pretty hard done by. As a holder I share the pain. However, our job as investors is to be realistic - it is in Aviva's wider interests to retire these instruments and holders of the ordinary stock, who have a stake in the game, should want them to do so. Turning a business issue into a moral campaign is pointless, it just gets in the way of making rational investing decisions.
The statement from Aviva is:
There's a precedent for cancellation of preference shares via a House of Fraser case in which the reduction in capital was held not to constitute a variation in rights. It's a pretty clear finding, regardless of whether we like it or not.
Basically it turns out that "perpetual" and "iredeemable" are marketing constructs rather than meaningful legal terms and the price reductions we've seen this week are likely to be permanent, as in most cases the preference shares are probably only worth par value plus dividends plus hope. Even if a PR campaign can embarrass Aviva into not cancelling the prefs the likely reality that they can do so at any time is not going to go away.
There are more details on this at Mark Taber's ever excellent website: https://www.fixedincomeinvestm...
timarr
Hi timarr
‘Basically it turns out that "perpetual" and "iredeemable" are marketing constructs rather than meaningful legal terms’
So lies then? If so then they are no better than con artists & the FCA should shut them down from any further bond issuance
So lies then? If so then they are no better than con artists & the FCA should shut them down from any further bond issuance
Which would jeopardise thousands of jobs, and create market turmoil which would have a far greater affect on our portfolios than what's already happened. In the end "perpetual" and "irredeemable" mean whatever the prospectus says they do, not what we think they do. It's a reminder that we always need to look at the detail rather than relying on the label.
And, of course, if our only course of action is to rely on the FCA for any real protection we might as well give up now ...
timarr
As a lawyer I am naturally inclined to agree timarr’s analysis that it is simply a matter of law as to whether Aviva can and should cancel the irredeemable/perpetual preference shares and morality is besides the point.
However, each time a company decides to exercise a right against an investor that is hidden in an ambiguous interpretation of the small print and contrary to the generally accepted and apparent position they lower trust in contracts and increase the cost of capital in the long term. The U.K. has traditionally been a good place to raise capital because the concept of “my word is my bond” has more generally prevailed than in some other countries where the cost of capital has accordingly been higher.
Even as a lawyer I am not going to want to invest where I need to instruct specialist counsel to advise me of possible risks lurking in the small print. When trust in the integrity of instiions is lowered in this way the cost of capital rises. The long term effect of the morality of anything this side of outright fraud being acceptable has ugly consequences. Quite rightly we do not laud those who make money out of ransome strips in spite of these being legal.
I have only suffered from a knock on affect on a small holding of RSAB.L I have which is not going to make any real difference to my life, but I shall certainly cancel all insurance contracts I have with Aviva if they go ahead and cancel their irredeemable prefs at par to mark my disapproval in some small way.
Of course, while capital is generally available from institutions run by those that do not have skin in the game in the Naseem Taleb sense the cost of capital is not going to be drastically affected but the long term effect will tend to lower such comparative advantage as the U.K. currently has as a decent place to invest.
Homosap
Hi Homosap
As a lawyer I am naturally inclined to agree timarr’s analysis that it is simply a matter of law as to whether Aviva can and should cancel the irredeemable/perpetual preference shares and morality is besides the point.
Just to be clear - I'm not suggesting in any way that Aviva's actions are morally acceptable or that I condone them. They're not and I don't.
However, I also believe that investing is done best when it's done without emotion. It's important to separate our genuine distaste for Aviva's actions from our own judgements about what to do. I well remember the anger when LLoyds pulled a similar stunt a few years ago. Reading the TMF boards you could see the confirmation bias at work as people convinced themselves and each other that their shared moral revulsion at Lloyds' actions meant their case was unassailable.
Sadly, it wasn't, although it was a close run thing. Lloyds got their way, and have suffered no noticeable damage in terms of reputation or capital raising capacity. You only have to look at how Argentina was able to raise funds on international markets only a few years after illegally appropriating investors' funds to realise that there are bigger forces at work than the concerns of a few private investors.
We can be angry by all means, but we mustn't let that cloud our judgements.
timarr
GBGMC0
Thanks for the sentiment...well you did ask so here goes
https://www.aviva.com/content/dam/aviva-corporate/documents/investors/pdfs/credit-investors/CU_Pref_Shares_Nov_1992.pdf
4(i) ..."The New Preference Shares will not be redeemable save with the approval of the holders of The New Preference Shares..."
The document then appears to contradict itself by stating in 4(iii) that the Preference shares can be redeemed on " a return of capital" but this term is not defined and is normally associated with the return of all the capital of the company
In my view 4(i) should prevail and so should the principle of permanent regulatory capital by no doubt Aviva's PR machine will be hard at work with regulators etc.
I meant Solvency II of course not Basel 2
Ssearby, I really feel for the holders here. Anyone in your situation would feel the same.
Can I ask though, there must be something somewhere in the "terms and conditions" about being able to cancel them though. Else what are they actually going to argue in court.
If they go through with repurchasing at par then this is disgraceful. These were instruments designed to give the insurer the benefit of regulatory capital with the regulators clear approval, because they were designed to be equity like i.e. irredeemable - a permanent part of the capital structure.
We (yes I hold) the noteholders were paid for the risk we were taking to protect policyholders against loss, as we stood behind them (and senior note holders) in a winding up.
Now we learn that we can also suffer big losses because the insurers creditworthiness has improved! I am guessing due to regulatory changes (Basel 2?) these are now expensive capital (more debt like for the issuer) and therefore Aviva wants to 'repay' them. Aviva will now probably argue that, like senior notes, the holders of these prefs should have realised that the price is ultimately par. However these have no redemption date so par value does not apply. They have been very happy to issue multiple tranches of such instruments at progressively lower yields, the yields having been driven down because of the strong performance of the earlier prefs in the after market.
I will be writing both to the FCA but also the rating agencies who should be penalising Aviva for trying to redeem. Hopefully there are enough institutional holders to make a big fuss.
Yes, my Ecclesiastical Insurance Office (LON:ELLA) and Lloyds Banking (LON:LLPC) down sharply.
At first glance it looks like Aviva can probably get away with this: no doubt there'll be a fight which will go to court if they persist. But if they win the case then the whole concept of "irredeemable" preference shares must be in doubt.
I'll hold what I've got but not remotely tempted to add to them.
timarr
Yes the future of preference shares lies in the balance unless there is something to say that they will not be cancel. Good luck Aviva if you want to raise money in the future, can't see them getting much support. I was considering buying some Aviva (LON:AV.) shares, certainly won't be doing that now. Hopefully other preference shares issuers will give sort of confirmation that they will not be cancelled. If you bought recently you could be suffering a large capital loss.
Thanks for that, I was wondering what was going on with my Lloyds Banking (LON:LLPC) shares, down about 15% today. Very tempted to top up but have resisted, will have a look on Monday.
I too have a LLPC holding. I carefully read the prospectus, and it is quite clear Lloyds cannot cancel these shares, stating several times they are irredeemable. Of course some legal eagle might argue black is white!
That is good to know, I hope the share price will recover.
Not a holder but this is shocking behaviour IMHO. Hopefully they will see sense and avoid destroying pensions / retirement funds. I thought they were better than that but will now think twice when renewing my insurance policies with them